Adobe Q3: $550 Million In Net New ARR Growth Guidance Is Not Bad

Core Viewpoint - Adobe continues to demonstrate strong growth in its digital media and experience segments, despite a weak guidance for net new digital media annual recurring revenue (ARR) in Q4, which is expected to decline by 3.3% year-over-year. The company maintains a "Strong Buy" rating with a fair value of $600 per share [2][21]. Financial Performance - Adobe reported an 11% constant revenue growth, with 12% growth in Digital Media and 10% growth in the Digital Experience segment [4]. - For Q4 FY23, Adobe generated $569 million in net new digital media ARR but has guided for $550 million in the upcoming quarter [6][10]. - The company is guiding for total revenue of $5.5 to $5.55 billion in Q4, implying a 9.5% year-over-year growth [10][11]. Product Development and AI Integration - Adobe is set to release its Firefly Video Model later this year, which will allow creators to generate videos using AI tools, potentially competing with models from OpenAI and Runway [5]. - The company has surpassed 12 billion Firefly-powered generations across its tools, indicating significant investment in AI functionalities [4][9]. - AI-powered features in Adobe's platforms are expected to enhance customer engagement and drive additional subscriptions, contributing to future ARR growth [9][12]. Segment Growth Projections - The Digital Media segment is projected to grow by 12%, with 10% from traditional platforms and 2% from AI-related features [12]. - The Digital Experience segment has shown strong growth, with a 50% year-over-year increase in Adobe Experience Platform (AEP) and native applications [12]. Valuation and Future Outlook - The discounted cash flow (DCF) model projects an overall revenue growth of 11%, with operating margin expansion driven by pricing increases and operational efficiencies [13]. - The weighted average cost of capital (WACC) is calculated at 12.6%, supporting the fair value estimate of $600 per share [19].